Yuan Gains Will Slow to 3% During Second Half, Researcher Says

By Judy Chen

July 23 (Bloomberg) -- China will slow the yuan's gains to about 3 percent in the second half of the year to help exporters weather a decline in global demand and rising costs, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.

The yuan appreciated 6.6 percent against the dollar in the first half, extending its advance to 21 percent since its fixed exchange rate was scrapped in 2005. The strengthening currency has slowed growth in overseas shipments, which expanded by the least in four months in June. Premier Wen Jiabao pledged to keep trade policies stable to help exporters during his visit to Guangdong province from July 19 to July 20.

``The fast appreciation has drawn opposition from exporters and some government departments,'' Zhang, who writes articles on the yuan for the state-run academy's Web site, said in an interview in Beijing. ``The government will slow yuan gains as bankruptcies rise in coastal provinces.''

China's currency will advance 10 percent during 2008, Zhang said, which would bring it to 6.64 per dollar by the end of the year. CASS, made up of 31 research institutes, regularly carries out studies of economic issues on behalf of the government. The yuan closed at 6.8217 per dollar yesterday, according to the China Foreign Exchange Trade System.

Zhang's forecast is similar to that of traders. Non- deliverable forward contracts, which allow investors to lock in a value for the currency in the future, show the market is betting on a 2.9 percent advance to 6.6315 in six months.

The yuan will reach 6.64 per dollar by year-end, according to the median estimate of 28 analysts surveyed by Bloomberg News.

The Ministry of Commerce has urged the cabinet to slow yuan appreciation and raise tax rebates to boost exports, an official at the ministry said on July 14. The official declined to be identified because he isn't authorized to speak to the media.

Textile Exports

Two-thirds of textile manufacturers weren't profitable in the first five months of this year, Du Yuzhou, President of China Chamber of Commerce for Import and Export of Textiles, said at an industry conference in Shanghai on July 15.

The yuan remains undervalued and China needs to let the currency rise further to ``rebalance'' the sources of its economic growth, Morris Goldstein and Nicholas Lardy, senior fellows at the Peterson Institute for International Economics, wrote in the Financial Times today.

China's should accelerate the pace of yuan appreciation and move away from relying on investment and its trade surplus for growth, Goldstein and Lardy wrote in the newspaper.

The adjustment in the pace of the yuan's gains won't halt its appreciation or stop the central bank from improving the balance of payments, Zhang said. China's trade surplus narrowed 20.6 percent to $21.4 billion in June from a year earlier, the third straight reduction, the government said July 10.

``A smaller trade surplus is what we are trying to achieve in this exchange-rate reform,'' said Zhang. ``We can't give it up just because of the current difficulties. Too many resources have been allocated to the export industry because of the undervalued yuan, making it difficult to boost domestic consumption.''

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net.